Property development is becoming increasingly popular, especially in a cooling market. Profit margins are becoming slimmer for straight flipping (buy to sell without development) so people are starting to look for properties in need of a little TLC to make that extra fortune.
It’s still frustrating to witness inexperienced developers fall into the most basic development traps, consequently taking huge hits to their profits. Anyone that falls into a basic trap either didn’t do enough research and/or doesn’t understand how development works and what affects profit and loss. Unfortunately, a mule will always be a mule, so sometimes solid advice just lands on deaf ears. Let’s face it, developers aren’t exactly renowned for being democratic. However, some of you can be savedâ€¦
1: Calculate your costs before starting any project
Before buying a development project, make sure you do a thorough analysis of your finances. Here are some of the figures you should be looking to retrieve:
- how much is the property currently worth
- how much are similar properties in the same area selling for
- how much will your property be worth once it’s been developed
- how much money will you need to develop the project (get quotes from tradesman)
Those vital figures will tell you whether a project is worth pursing or not.
2: Know what you’re buying
It might be worth employing a builder to check out the property before making an offer. Properties that are in need of restoration often have a lot of problems that can’t be seen with the naked eye. Relying on an estate agent and vendor to declare all the hidden beauties is a tactic I wouldn’t recommend for the sane. If you buy yourself a property with a lot of hidden surprises your budget and profit will go out of the subsided window. Literally.
3: Supply and demand
There’s no point transforming a 3 bedroom house into an 8 bedroom house if there is no demand for 8 bedroom properties in the area. You need to know what the local market is looking for; the best way to do that is by talking to local estate agents. By getting an idea of what types of properties are most in demand, you can base your development around the spec. Supply what is in demand.
4: What adds value to the property?
If you’ve purchased a property on a road that has limited parking space, it might be worth building a garage, space permitting, as opposed to that extra dining room. Of course, you can find out from your estate agent what will add that extra bit of value.
5: Planning permission
Buying a property with great visions of expansion can quickly become a nightmare if you can’t get permission from the local planning authority. Make sure you can get planning permission, or better yet buy a property that already has planning permission.
6: Produce a realistic budget and stick to it
It’s imperative that you stick to a budget; otherwise you could be watching your profits shrink very quickly. You need to be realistic from the start, and then maintain a strict hold of your budget. The amount of people I see losing grip of their budget is unbelievable; it’s crazy how easily developers part with money. Granted, higher risk equals higher gain, but there is never any gain when throwing money down the drain.
7: Don’t cater for your own taste
You want your property to appeal to as many people as possible to make sure your property sells quickly. The longer you leave your market on the property for, the more it will cost you. Time is money. By designing a property to your own taste you’ll be ultimately limiting your market. Try to keep things neutral and easy on the eyes. Even easily correctable features like ill-coloured paint can scare buyers away. What can I say, man? People scare easy.
8: Forget the luxury accessories; focus on the bread and butter
Adding gadgets like CCTV and luxury fish tanks built into the wall won’t add value to your property, and they certainly won’t be the definitive features that will make or break a deal. Instead of putting money into state of the art technology, put the money back into your pocket or spend it on more fruitful features E.g solid kitchen or bathroom units.
9: Know the difference between success and failure.
A lot of developers only make a profit from development because the property market has been kind to them. By the time the development is over, prices may have increased by 10%. In that case, they would have made just as much profit (if not more) if they didn’t shed blood and spend a fortune on the development.
If someone purchased a property for 100k, spent 20k developing it, and sold it for 140k with a 10% rise in property prices; their efforts made them 10k. Obviously 10k is a lot of money, but the profit margin isn’t substantial for a project that may have lasted 6 months. In a steady market the developer would have struggled.
Measure success on actual development work as opposed to the condition of the market. Don’t forecast your profit on future house prices; the property market can be fickle and switch in any which way.
10. Work with people you can trust
The odds are you will employ a builder and various other tradesmen to help renovate your property. Picking the right tradesmen is vital; they alone can determine the success of your project. If you don’t already have a reliable team of workers, ask friends and family for recommended labourers. If your resources run dry and you’re relying on a random workforce, then use what is right in front of you, THE INTERNET, to check references. Look online for reviews of reliable tradesman. Odds are that if someone has done a superb or a terrible job, it’s been written about on a forum somewhere.
11. Project Management
A lot of people employ professional project managers to make sure everything is kept inline, including the builders. Their job is to make sure the project runs smoothly, which entails time and cost efficiency. Project Mangers can be an expensive asset, so a lot of enthusiasts take on the roll themselves. It can be a fun and highly rewarding experience if you can carry the swagger that is required. If you’re not the forward pro-active type, then you may need to completely transform into new a suit just to get this project done. If people are slacking and consequently costing you, you need to put your foot down and rectify the issue. Basically, plan the project, be realistic, stick to your timeline and be aggressive when you need to be.
One thing you need to remember is that it’s your money on the line and time is everything, so you need to make sure things are completed in appropriate time. Don’t take a one day loss lightly, because those days can slowly build up into weeks.
Disclaimer: I'm just a simple landlord blogger; I'm not qualified to give legal or financial advice. Any information I share is my opinion based on my personal experiences as an active landlord, and should never be construed as legal or professional advice. For more information, please read my full disclaimer.